2Q26 Client Update

After our terrific year last year, I was hoping for more of the same in 2026. And while we got off to a good start in 1Q26, we didn’t make much progress in 2Q26.

That’s because the market is increasingly focused on the semiconductor stocks that provide the components for the buildout of the infrastructure for Artificial Intelligence – in which we are not invested because they are outside our circle of competence.

In fact, a bifurcation has opened up within technology stocks between what Interactive Brokers Chief Strategist Steve Sosnick calls “Makers and Takers” (June 25, 2026): “The semiconductor manufacturers and other suppliers are gaining at the expense of their largest customers.” You can see this in above chart in the divergence in performance between the semiconductor stocks (SMH), especially the memory chip makers (MU SNDK EWY (South Korea)), and the hyperscalers (MAGS). The Magnificent 7 were actually -2.52% in the first half of 2026.

As I explained in “The Contradiction at the Heart of the Market” (June 25, 2026) this dynamic is unsustainable. Unless AI starts to produce return on investment (ROI) for the hyperscalers, at some point (soon?) they are going to cut back on their CapEx which will put an end to the parabolic moves in the semiconductor stocks that are now the key pillar holding up the market. When that happens, I suspect the market will top out for the current cycle.

As for Top Gun, the primary reason we haven’t made much progress this year is the lack of performance from the precious metals miners after a terrific 2025. However, I’m not worried. I still believe secular inflation is here to stay and these companies fundamentals are absolutely stellar at current prices for gold and silver. Put another way, I believe these stocks are consolidating for another run higher at some point in the near future.

There aren’t always great things to do and sometimes we maximize our contribution by being discerning and relatively inactive. Patient opportunism – waiting for bargains – is often your best strategy…. You’ll do better if you wait for investments to come to you rather than chasing after them – Howard Marks, The Most Important Thing, Ch 13: Patient Opportunism (p. 107)

So we practice what Howard Marks calls “patient opportunism”. We don’t chase what the crowd is chasing. We wait for investments to come to us like the software stocks that I have loaded up on due to fears about AI disrupting their businesses.

From a broader perspective, we are in what Marks terms a low return environment. That is, the market is expensive and there is a paucity of attractive investments at the current moment. But that won’t last. While we do own a lot of stock, I am also holding some cash so that we will be ready to pounce when the market rolls over and others are forced to sell, creating the environment to pick up great companies at cheap prices. At some point, perhaps sooner rather than later, the market will give us an opportunity to buy a lot of great stocks at good prices. If we chase now, we won’t have the dry powder to act then. That time, however, is not now. And so we wait…..